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Item 9A. Controls and Procedures

2021-04-13 compared with 2020-03-27 · 829 added, 951 removed, 367 unchanged (83% of the section changed)

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This Report includes the certifications of our principal executive

officer and principal financial officer required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange

officer and principal financial officer required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act).

See Exhibits 31.1 and 31.2.

This Item 9A includes information concerning the controls and control evaluations referred to

in those certifications.

This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.

(a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e)

and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted

under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange

Commission’s rules and forms and that such information is accumulated and communicated to management, including our President,

who is our acting principal executive officer, and our Vice President of Finance, who is our acting principal financial officer,

to allow timely decisions regarding required disclosures.

In connection with the preparation of this Annual Report on

Form 10-K, our management, under the supervision and with the participation of our principal executive officer and principal financial

officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as

Disclosure controls and procedures (as defined in Rules 13a-15(e) and

15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under

the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission’s

rules and forms and that such information is accumulated and communicated to management, including our President, who is our acting principal

executive officer, and our Vice President of Finance, who is our acting principal financial officer, to allow timely decisions regarding

required disclosures.

In connection with the preparation of this Annual Report on Form 10-K,

our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted

an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020.

disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the

reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified

in the Securities and Exchange Commission’s rules and forms, and our management necessarily was required to apply its judgment in

evaluating and implementing our disclosure controls and procedures.

Based upon the evaluation described above, our principal executive

officer and principal financial officer have concluded that they believe that our disclosure controls and procedures were effective, as

of the end of the period covered by this report, in providing reasonable assurance that information required to be disclosed by us in

the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive

officer and principal financial officer, to allow timely decisions regarding required disclosures, and is recorded, processed, summarized

and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Management’s Annual Report on Internal Control Over Financial

Our management, under the supervision of the principal executive officer

and the principal financial officer, is responsible for establishing and maintaining an adequate system of internal control over financial

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed

to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with U.S.

A company’s internal control over financial reporting includes

those policies and procedures that:

(a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect

the transactions and dispositions of our assets;

(b) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of consolidated financial statements in accordance with U.S.

are being made only in accordance with appropriate authorization of management and the Board of Directors;

and (d) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material

effect on the consolidated financial statements.

Due to its inherent limitations, internal control over financial reporting

may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk

that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures

may deteriorate.

In connection with the preparation of this report, our management conducted

an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria established

in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway

Commission (COSO).

As a result of that evaluation, management has concluded that a material weakness

in internal control over financial reporting existed as of December 31, 2020, being that w e did not design or maintain effective

internal controls over the timely identification and recording of financial statement adjustments.

Specifically, we did not identify,

analyze, record, and disclose certain non-routine accounting matters, such as a lease extension and a grant contract, timely and

As a smaller reporting company, we are exempt from the auditor attestation

requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

As a result, RSM US LLP, our independent registered public accounting firm,

has not audited or issued an attestation report with respect to the effectiveness of our internal control over financial reporting as

of December 31, 2020.

Our disclosure controls and procedures are designed to provide reasonable assurance that information required

to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported

within the time periods specified in the Securities and Exchange Commission’s rules and forms, and our management necessarily

was required to apply its judgment in evaluating and implementing our disclosure controls and procedures.

Based upon the evaluation

described above, our principal executive officer and principal financial officer have concluded that they believe that our disclosure

controls and procedures were effective, as of the end of the period covered by this report, in providing reasonable assurance that

information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated

to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding

required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the Securities and

Exchange Commission’s rules and forms.

(b) Management’s Annual Report on Internal Control

Over Financial Reporting

Our management, under the supervision of the principal executive

officer and the principal financial officer, is responsible for establishing and maintaining an adequate system of internal control

over financial reporting.

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange

Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation

of financial statements for external purposes in accordance with U.S.

A company’s internal control over financial reporting

includes those policies and procedures that:

(a) pertain to the maintenance of records that, in reasonable detail, accurately and

fairly reflect the transactions and dispositions of our assets;

(b) provide reasonable assurance that transactions are recorded

as necessary to permit preparation of consolidated financial statements in accordance with U.S.

that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of

and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition

of our assets that could have a material effect on the consolidated financial statements.

Due to its inherent limitations, internal control over financial

reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject

to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies

or procedures may deteriorate.

In connection with the preparation of this report, our management

conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 based on

the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring

Organizations of the Treadway Commission (COSO).

As a result of that evaluation, management has concluded that our internal control

over financial reporting was effective as of December 31, 2019.

As an “emerging growth company”

under the Jumpstart

Our Business Startups Act, and as a smaller reporting company, we are exempt from the auditor attestation requirements of Section

404 of the Sarbanes-Oxley Act of 2002.

As a result, RSM US LLP, our independent registered public accounting firm, has not audited

or issued an attestation report with respect to the effectiveness of our internal control over financial reporting as of December

Our management, with the participation of the principal executive

officer and the principal financial officer, has evaluated whether any change in our internal control over financial reporting

occurred during the fourth quarter ended December 31, 2019.

Based on that evaluation, management concluded that there were no changes

in our internal controls over financial reporting during the quarter ended December 31, 2019 that materially affected, or are reasonably

likely to materially affect our internal controls over financial reporting.

Our management, with the participation of the principal executive officer

and the principal financial officer, has evaluated whether any change in our internal control over financial reporting occurred during

the fourth quarter ended December 31, 2020.

Based on that evaluation, management concluded that there were no changes in our internal

controls over financial reporting during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially

affect, our internal controls over financial reporting.

(d) Remediation Plan

are committed to remediating the material weaknesses in a timely fashion, including through the engagement of Point Providence

Consulting and related appointment of Mr.

Pellegrino as our Interim Vice President of Finance .

As management continues to evaluate and work to improve its internal control over financial reporting, management may determine it is

necessary to take additional measures to address the material weakness.

Until the controls have been operating for a sufficient period

of time and management has concluded, through testing, that these controls are operating effectively, the material weakness described

above will continue to exist.

Other Information.

Directors, Executive Officers and Corporate Governance.

Incorporated by reference to our definitive Proxy Statement

to be filed pursuant to Regulation 14A under the Exchange Act, in connection with our 2020 Annual Meeting of Stockholders.

concerning executive officers of our company is included in Part I of this Annual Report on Form 10-K as Item 1.

Business - Information

about our Executive Officers and incorporated herein by reference.

Incorporated by reference to our definitive Proxy Statement to be filed

pursuant to Regulation 14A under the Exchange Act, in connection with our 2021 Annual Meeting of Stockholders.

Information concerning

executive officers of our company is included in Part I of this Annual Report on Form 10-K as Item 1.

Business - Information about our

Executive Officers and incorporated herein by reference.

Executive Compensation.

Incorporated by reference to our definitive Proxy Statement

to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2020 Annual Meeting of Stockholders.

Incorporated by reference to our definitive Proxy Statement to be filed

pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference to our definitive Proxy Statement

to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2020 Annual Meeting of Stockholders.

Incorporated by reference to our definitive Proxy Statement to be filed

pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders.

Certain Relationships and Related Transactions, and Director Independence.

Incorporated by reference to our definitive Proxy Statement

to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2020 Annual Meeting of Stockholders.

Incorporated by reference to our definitive Proxy Statement to be filed

pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders.

Principal Accounting Fees and Services.

Incorporated by reference to our definitive Proxy Statement

to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2020 Annual Meeting of Stockholders.

Incorporated by reference to our definitive Proxy Statement to be filed

pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders.

Exhibits, Financial Statement Schedules.

(a) Documents Filed.

The following documents are filed as part

of this Annual Report on Form 10-K:

The following documents are filed as part of this

Annual Report on Form 10-K:

(1) Financial Statements.

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(2) Financial Statement Schedules:

Financial statement schedules have been omitted since the required information

is included in our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.

The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on

Financial statement schedules have been omitted since the required information is

included in our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.

(3) Exhibits.

The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on Form 10-K.

(b) Exhibits:

The exhibits listed in the accompanying Exhibit

Index are filed as a part of this Annual Report on Form 10-K.

The exhibits listed in the accompanying Exhibit Index

are filed as a part of this Annual Report on Form 10-K.

Financial statement schedules have been omitted since the required information is included in our consolidated financial statements

contained elsewhere in this Annual Report on Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial statement schedules have been omitted since the required information is included in our consolidated financial statements contained

elsewhere in this Annual Report on Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL

BIOSTAGE, INC.

Report of Independent

Registered Public Accounting Firm

Consolidated Balance

Sheets as of December 31, 2019 and 2018

Consolidated Statements

of Operations for the years ended December 31, 2019 and 2018

Consolidated Statements

of Stockholders’

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2020 and 2019

Consolidated Statements

of Cash Flows for the years ended December 31, 2019 and 2018

Notes to Consolidated

Financial Statements

Report of Independent Registered Public

Accounting Firm

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting

To the Shareholders and the Board of Directors of

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets

of Biostage, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations,

stockholders’

equity and cash flows for the years then ended, and the related notes (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of

December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting

We have audited the accompanying consolidated balance sheets of Biostage,

and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’

equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company

as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting

principles generally accepted in the United States of America.

Emphasis of Matter Regarding Going Concern

The accompanying financial statements have been prepared assuming

that the Company will continue as a going concern.

As discussed in Note 1 to the financial statements, the Company has suffered

recurring losses from operations, has an accumulated deficit, uses cash flows in operations, and will require additional financing

to continue to fund operations.

The accompanying financial statements have been prepared assuming that

the Company will continue as a going concern.

As discussed in Note 1 to the financial statements, the Company has suffered recurring losses

from operations, has an accumulated deficit, uses cash flows in operations, and will require additional financing to continue to fund

This raises substantial doubt about the Company's ability to continue as a going concern.

plans in regard to these matters also are described in Note 1.

The financial statements do not include any adjustments that might

result from the outcome of this uncertainty.

Management's plans in regard to

these matters also are described in Note 1.

The financial statements do not include any adjustments that might result from the outcome

of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

These financial statements are the responsibility of the Company’s

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public

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and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free

of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit

of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control

over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control

over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks

of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as

well as evaluating the overall presentation of the financial statements.

We believe that our audits provides a reasonable basis

for our opinion.

Our audits included performing procedures to assess the risks of material

misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures

included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included

evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation

of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from

the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,

subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements,

taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit

matters or on the accounts or disclosures to which they relate.

Share-based Compensation –

Performance-Based Awards

As described in Note 15 to the consolidated financial statements, the

Company has 243,532 unvested performance-based options outstanding for which there is unrecognized compensation expense of $0.8 million

at December 31, 2020.

No expense has been recognized for these unvested awards as of December 31, 2020 given that the milestone achievements

for these awards have not yet been deemed probable for accounting purposes.

As described in Note 2 to the consolidated financial statements,

the Company measures all stock options and restricted stock awards granted to employees, directors and non-employees based on the fair

value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service

Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from

the date when it is determined that the achievement of the milestone is probable to the vesting/milestone achievement date.

We identified the Company’s expense recognition for share-based

awards that contain performance-based vesting provisions as a critical audit matter.

The principal considerations for our determination

that the expense recognition for share-based awards that contain performance-based vesting provision awards is a critical audit matter

are the assumptions and risk of bias related to the conclusion of the probability of achievement of the performance conditions impacting

vesting of the awards, or more specifically the achievement of the business milestones, as defined in the grant agreements.

Auditing management’s

assumptions regarding the probability of achievement of the business milestones defined in the grant agreements was complex and required

a high degree of auditor judgment and increased audit effort.

Our audit procedures related to the expense recognition of share-based

awards that contain performance-based vesting provisions included the following, among others:

We obtained and read the grant agreements for all outstanding share-based

awards with performance-based vesting provisions,

We recalculated the total outstanding share-based awards with performance-based

vesting provisions at year-end based upon cumulative grants, net of cumulative forfeitures, and

We discussed with management their conclusion and we evaluated their conclusion

on the probability of achievement of the business milestone within the performance-based awards by assessing the Company’s liquidity

requirements needed to fund achievement of milestones outlined in the grant agreements and review of the Company’s public press

releases through issuance date.

/s/ RSM US LLP

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Boston, Massachusetts

March 27, 2020

April 13, 2021

BIOSTAGE, INC.

CONSOLIDATED BALANCE SHEETS

( In thousands, except par value and share

( In thousands, except par value and share data )

Current assets:

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Right-of-use assets

Total non-current assets

LIABILITIES AND STOCKHOLDERS' EQUITY

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Accrued and other current liabilities

Current portion of notes payable

Warrant liability

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Total current liabilities

Notes payable, net of current portion

Operating lease liability, net of current portion

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Stockholders' equity:

Undesignated preferred stock, $0.01 par value;

984,000 shares authorized at December 31, 2019 and 2018, none issued and outstanding

Common stock, par value $0.01 per share, 60,000,000 and 120,000,000 shares authorized at December 31, 2019 and 2018, respectively;

Preferred stock, $0.01 par value;

2,000,000 shares authorized as of December 31, 2020 and 2019,0 issued and outstanding

Common stock, par value $0.01 per share, 60,000,000 shares authorized as of December 31, 2020 and 2019;

9,388,407 and 8,155,555 issued and outstanding at December 31, 2020 and 2019, respectively

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Total liabilities and stockholders' equity

See accompanying notes to consolidated

financial statements.

See accompanying notes to consolidated financial

BIOSTAGE, INC.

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(In thousands, except per share data)

Years ended December 31,

Year ended December 31,

Operating expenses:

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Operating loss

Other income (expense):

Other income (expense), net:

Change in fair value of warrant liability

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Weighted average common shares, basic and diluted

See accompanying notes to consolidated

financial statements.

See accompanying notes to consolidated financial

BIOSTAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

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Share-based compensation

Issuance of common stock, net of offering costs

Conversion of Series D preferred to common stock

Issuance of warrants to purchase common stock in connection with issuance of Series D preferred and common stock above

Issuance of common stock and warrants to purchase common

Issuance of common stock from exercise

Balance at December 31, 2019

Share-based compensation

Issuance of common stock and warrants to purchase common stock

Issuance of common stock from exercise of warrants

Common stock withheld for taxes

Issuance of common stock and warrants to purchase common

Issuance of common stock from exercise

Balance at December 31, 2020

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(In thousands)

ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Year ended December 31,

OPERATING ACTIVITIES

Adjustments to reconcile net loss to net cash used in operating activities:

Share-based compensation expense

Amortization of right-of-use assets

Change in fair value of warrant liability

Loss on disposal of property, plant and equipment

Changes in operating assets and liabilities:

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Accrued and other current liabilities

Lease liabilities

Net cash used in operating activities

CASH FLOWS FROM IN INVESTING ACTIVITIES

INVESTING ACTIVITIES

Purchases of property, plant and equipment

Cash received from sale of property, plant and equipment

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Repayment of related party advance

Proceeds from issuance of common stock and warrants, net of offering costs

FINANCING ACTIVITIES

Proceeds from issuance of common stock and warrants

Proceeds from exercise of warrants

Proceeds from notes payable

Acquisition of common stock for tax withholding obligations

Net cash provided by financing activities

Net decrease in cash and restricted cash

Net increase (decrease) in cash and restricted cash

Cash and restricted cash at the beginning of the year

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Supplemental disclosure of non-cash investing and financing activities:

Conversion of Series D preferred stock into common stock

See accompanying notes to consolidated

financial statements.

Issuance of vested common stock

Supplemental disclosure of non-cash operating activities:

Increase of right-of-use asset and liability due to lease extension

See accompanying notes to consolidated financial

BIOSTAGE, INC.

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Years Ended December 31, 2020 and 2019

(Biostage or the Company) is a biotechnology company developing bioengineered organ implants based on the Company’s

novel Cellframe TM and Cellspan TM

The Company’s technology is comprised of a biocompatible scaffold that is seeded with the recipient’s own

The Company believes that this technology may prove to be effective for treating patients across a number of life-threatening

medical indications who currently have unmet medical needs.

The Company is currently developing its technology to treat life-threatening

conditions of the esophagus, bronchus or trachea with the objective of dramatically improving the treatment paradigm for those

Since inception, the Company has devoted substantially all of its efforts to business planning, research and development,

recruiting management and technical staff, and acquiring operating assets.

Biostage, Inc.

(Biostage or the Company) is a biotechnology

company developing bioengineered organ implants based on the Company’s novel Cellframe ™

and Cellspan ™

The Company’s technology is comprised of a biocompatible

scaffold that is seeded with the recipient’s own cells.

The Company believes that this technology may prove to be effective

for treating patients across a number of life-threatening medical indications who currently have unmet medical needs.

The Company is

currently developing its technology to treat life-threatening conditions of the esophagus, bronchus or trachea with the objective of

dramatically improving the treatment paradigm for those patients.

Since inception, the Company has devoted substantially all of its

efforts to business planning, research and development, recruiting management and technical staff, and acquiring operating

On October 31, 2013, Harvard Bioscience, Inc.

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the spin-off of the Company from Harvard Bioscience was completed.

On that date, the Company became an independent company

that operates the regenerative medicine business previously owned by Harvard Bioscience.

The spin-off was completed through the

distribution to Harvard Bioscience stockholders of all the shares of common stock of Biostage (the Distribution).

On that date, the Company became an independent company that operates

the regenerative medicine business previously owned by Harvard Bioscience.

The spin-off was completed through the distribution to Harvard

Bioscience stockholders of all the shares of common stock of Biostage (the Distribution).

Basis of Presentation

The consolidated financial statements reflect the Company’s

financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United

The consolidated financial statements reflect the Company’s financial

position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States (U.S.

Going Concern

The Company has incurred substantial operating losses since

its inception, and as of December 31, 2019 had an accumulated deficit of approximately $64.1 million and

will require additional financing to fund future operations.

The Company expects that its operating cash on-hand at December 31,

2019 of approximately $0.9 million, along with net proceeds of approximately $1.0 million during the first quarter of 2020

from the issuance of 151,027 shares of our common stock at a purchase price of $3.70 per share and warrants to purchase 151,027

shares of common stock at an exercise price of $3.70 per share, and the issuance of 214,000 shares of our common stock from the

exercise of 214,000 previously issued warrants at $2.00 per share , will

enable it to fund its operating expenses and capital expenditure requirements into the second quarter of 2020.

these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company will need to raise additional funds to fund its

In the event the Company does not raise additional capital from outside sources in the second quarter, it may be forced

to curtail or cease its operations.

Cash requirements and cash resource needs will vary significantly depending upon the timing

of the financial and other resource needs that will be required to complete ongoing development, pre-clinical and clinical testing

of products, as well as regulatory efforts and collaborative arrangements necessary for the Company’s products that are currently

under development.

The Company is currently seeking and will continue to seek financings from other existing and/or new investors

to raise necessary funds through a combination of public or private equity offerings.

The Company may also pursue debt financings,

other financing mechanisms, research grants, or strategic collaborations and licensing arrangements.

The Company may not be able

to obtain additional financing on favorable terms, if at all.

The Company’s operations will be adversely affected if

it is unable to raise or obtain needed funding and may materially affect the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern

and therefore, the consolidated financial statements do not include any adjustments to reflect the possible future effects on the

recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of

this uncertainty.

The Company has incurred substantial operating losses since its inception,

and as of December 31, 2020 had an accumulated deficit of approximately $69.0 million and will require additional financing to fund future

The Company expects that its operating cash on-hand as of December 31, 2020 of approximately $1.0 million, along with cash

proceeds of approximately $0.2 million received during the first quarter of 2021 from Phase II of the SBIR grant will enable it to fund

its operating expenses and capital expenditure requirements into June of 2021.

Therefore, these conditions raise substantial doubt about

the Company’s ability to continue as a going concern.

The Company will need to raise additional funds to fund its operations.

In the event the Company does not raise additional capital from outside sources in the second quarter, it may be forced to curtail or

cease its operations.

Cash requirements and cash resource needs will vary significantly depending upon the timing of the financial and

other resource needs that will be required to complete ongoing development, pre-clinical and clinical testing of products, as well as

regulatory efforts and collaborative arrangements necessary for the Company’s products that are currently under development.

Company is currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through

a combination of public or private equity offerings.

The Company may also pursue debt financings, other financing mechanisms, research

grants, or strategic collaborations and licensing arrangements.

The Company may not be able to obtain additional financing on favorable

terms, if at all.

The Company’s operations will be adversely affected if it is

unable to raise or obtain needed funding and may materially affect the Company’s ability to continue as a going concern.

The accompanying

consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the consolidated

financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of

assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of

Biostage, and its two wholly-owned subsidiaries, Harvard Apparatus Regenerative Technology GmbH (Germany) and Biostage Limited

(UK), which are currently dormant and do not have any net assets at December 31, 2019.

The functional currency for these subsidiaries

is the U.S dollar.

The consolidated financial statements include the accounts of Biostage,

and three wholly-owned subsidiaries, Harvard Apparatus Regenerative Technology Limited (Hong Kong), Harvard Apparatus Regenerative Technology

GmbH (Germany) and Biostage Limited (UK).

The three wholly-owned subsidiaries do not have any net assets as of December 31, 2020.

functional currency for these subsidiaries is the U.S dollar.

All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The process of preparing consolidated financial statements in

conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated

financial statements and accompanying notes.

Such estimates include, but are not limited to, share-based compensation, valuation

of warrant liability, accruals, depreciation and income taxes.

The process of preparing consolidated financial statements in conformity

GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements

and accompanying notes.

Such estimates include, but are not limited to, share-based compensation, valuation of warrant liability, accrued

expenses and the valuation allowance for deferred income taxes.

Actual results could differ from those estimates.

2 unchanged sentences

Restricted Cash

Restricted cash consists of $50,000 held as collateral for the

Company’s credit card program as of December 31, 2019 and December 31, 2018.

Restricted cash consists of $50,000 held as collateral for the Company’s

credit card program as of December 31, 2020 and December 31, 2019.

Property, Plant and Equipment

Property, plant and equipment are carried at cost and depreciated

using the straight-line method over the estimated useful lives of the assets as follows:

Property, plant and equipment are carried at cost and depreciated using

the straight-line method over the estimated useful lives of the assets as follows:

Leasehold improvements

1 unchanged sentence

Furniture, machinery and equipment, computer equipment and software

Maintenance and repairs are charged to expense as incurred,

while any additions or improvements are capitalized.

Maintenance and repairs are charged to expense as incurred, while any

additions or improvements are capitalized.

Impairment of Long-Lived Assets

of long-lived assets and the remaining useful lives of such long-lived assets are reviewed for impairment whenever a triggering

event occurs or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

An asset, or group

of assets, are considered to be impaired when the undiscounted estimated net cash flows expected to be generated by the asset,

or group of assets, are less than its carrying amount.

The impairment recognized is the amount by which the carrying amount exceeds

the fair market value of the impaired asset, or group of assets, based on the present value of the expected future cash flows associated

with the use of the asset.

Through December 31, 2019, no such impairment charge has been recorded.

Assessments of long-lived assets and the remaining useful lives of

such long-lived assets are reviewed for impairment whenever a triggering event occurs or changes in circumstances indicate that the carrying

amount of the assets may not be recoverable.

An asset, or group of assets, are considered to be impaired when the undiscounted estimated

net cash flows expected to be generated by the asset, or group of assets, are less than its carrying amount.

The impairment recognized

is the amount by which the carrying amount exceeds the fair market value of the impaired asset, or group of assets, based on the present

value of the expected future cash flows associated with the use of the asset.

Through December 31, 2020, no such impairment charge has

been recorded.

Research and Development

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Share-based Compensation

Company measures all stock options and restricted stock awards granted to employees, directors and non-employees based on the fair

value on the date of the grant and recognizes compensation expense of those awards, net of forfeitures, over the requisite service

period, which is generally the vesting period of the respective award.

Generally, the Company issues stock options and restricted

stock awards with only service-based vesting conditions on a straight-line basis over the requisite service period for the entire

award (that is, over the requisite service period of the last separately vesting portion of the award).

Expense on share-based

awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when it is determined

that the achievement of the milestone is probable to the vesting/milestone achievement date.

The Company elected to use the Black-Scholes option-pricing

model for valuation of stock-based payment awards.

The determination of fair value of stock-based payment awards on the date of

grant using the Black-Scholes option-pricing model is affected by its stock price as well as assumptions regarding a number of

subjective variables.

These variables include, but are not limited to, its expected stock price volatility over the term of the

awards and actual and projected employee stock option exercise behaviors.

When performance-based grants are issued, the Company

recognizes no expense until achievement of the performance requirement is deemed probable.

Share-based compensation expense is based on awards ultimately

expected to vest and has been reduced for annualized estimated forfeiture where the minimum amount of expense recorded is at least

equal to the percent of an award vested.

Forfeitures were estimated based on historical experience and weighting of various employee

classes under the respective plan at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ

from those estimates.

The fair values of Restricted Stock Units (RSU) are based on

the number of shares granted and market price of the stock on the date of grant and are recorded as compensation expense ratably

over the applicable service period, which is generally four years.

Unvested restricted stock units and vested and unvested stock

options are forfeited in the event of termination of employment.

Income taxes are accounted for under the asset and liability

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between

the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets

and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary

differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates

is recognized in income in the period that includes the enactment date.

Deferred tax assets and liabilities are recorded net as

long-term on the consolidated balance sheets.

A valuation allowance is recorded when it is more likely than

not that some or all of the deferred tax assets will not be realized.

Accordingly, the Company provides a valuation allowance,

if necessary, to reduce deferred tax assets to amounts that are expected to be realizable.

Tax positions taken or expected to be taken in the course of

preparing the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not”

measures all stock options and restricted stock awards granted to employees, directors and non-employees based on the fair value on the

date of the grant and recognizes compensation expense of those awards, net of forfeitures, over the requisite service period, which is

generally the vesting period of the respective award.

Generally, the Company issues stock options and restricted stock awards with only

service-based vesting conditions on a straight-line basis over the requisite service period for the entire award (that is, over the requisite

service period of the last separately vesting portion of the award).

Expense on share-based awards for which vesting is performance

or milestone based is recognized on a straight-line basis from the date when it is determined that the achievement of the milestone is

probable to the vesting/milestone achievement date.

The Company elected to use the Black-Scholes option-pricing model

for valuation of stock-based payment awards.

The determination of fair value of stock-based payment awards on the date of grant

using the Black-Scholes option-pricing model is affected by its stock price as well as assumptions regarding a number of subjective

These variables include, but are not limited to, its expected stock price volatility over the term of the awards and

actual and projected employee stock option exercise behaviors.

When performance-based grants are issued, the Company recognizes no

expense until achievement of the performance requirement is deemed probable.

Share-based compensation expense is based on awards ultimately expected

to vest and has been reduced for annualized estimated forfeiture where the minimum amount of expense recorded is at least equal to the

percent of an award vested.

Forfeitures are estimated based on historical experience and weighting of various employee classes under the

respective plan at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of Restricted Stock Units (RSU) are based on the number

of shares granted and market price of the stock on the date of grant and are recorded as compensation expense ratably over the applicable

service period, which is generally four years.

Unvested restricted stock units and vested and unvested stock options are forfeited in

the event of termination of employment.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using

enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes

the enactment date.

Deferred tax assets and liabilities are recorded net as long-term on the consolidated balance sheets.

A valuation allowance is recorded when it is more likely than not that

some or all of the deferred tax assets will not be realized.

Accordingly, the Company provides a valuation allowance, if necessary, to

reduce deferred tax assets to amounts that are expected to be realizable.

Tax positions taken or expected to be taken in the course of preparing

the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not”

of being sustained by the applicable tax authority.

Tax positions not deemed to meet a “more-likely-than-not”

would be recorded as a tax expense in the current year.

When necessary, the Company recognizes interest and penalties

related to uncertain tax positions in income tax expense.

threshold would

be recorded as a tax expense in the current year.

When necessary, the Company recognizes interest and penalties related

to uncertain tax positions in income tax expense.

Net Loss per Share

Basic net loss per share is computed using the weighted average

number of common shares outstanding during the period.

Diluted net loss per share is computed using the sum of the weighted average

number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common

stock, including the assumed exercise of stock options, warrants, and the impact of unvested restricted stock.

The Company applies the two-class method to calculate basic

and diluted net loss per share attributable to common stockholders as its warrants to purchase common stock are participating securities.

The two-class method is an earnings allocation formula that

treats a participating security as having rights to earnings that otherwise would have been available to common stockholders.

the two-class method does not impact the net loss per share of common stock as the Company has been in a net loss position and

the warrant holders do not participate in losses.

Basic and diluted shares outstanding are the same for each period

presented as all common stock equivalents would be antidilutive due to the net losses incurred.

Basic net loss per share is computed using the weighted average number

of common shares outstanding during the period.

Diluted net loss per share is computed using the sum of the weighted average number of

common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including

the assumed exercise of stock options, warrants, and the impact of unvested restricted stock.

The Company applies the two-class method to calculate basic and diluted

net loss per share attributable to common stockholders as its warrants to purchase common stock are participating securities.

The two-class method is an earnings allocation formula that treats

a participating security as having rights to earnings that otherwise would have been available to common stockholders.

However, the two-class

method does not impact the net loss per share of common stock as the Company has been in a net loss position and the warrant holders do

not participate in losses.

Basic and diluted shares outstanding are the same for each period presented

as all common stock equivalents would be antidilutive due to the net losses incurred.

Warrant Liability

The Company classifies warrants to purchase shares of its common

stock as a liability on its consolidated balance sheets when the warrant is a free-standing financial instrument that may require

the Company to transfer cash consideration upon exercise and that cash transfer event would be out of the Company’s control.

Such a “liability warrant”

is initially recorded at fair value on date of grant using the Black-Scholes model and net

of issuance costs, and it is subsequently re-measured to fair value at each subsequent balance sheet date.

Changes in fair value

of the warrant are recognized as a component of other income (expense), net in the consolidated statements of operations.

will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant.

For warrants that do not meet the criteria of a liability warrant

and are classified on the Company’s consolidated balance sheets as equity instruments, the Company uses the Black-Scholes

model to measure the value of the warrants at issuance and then applies the relative fair-value of the equity transaction between

common stock, preferred stock and warrants.

The Company classifies warrants to purchase shares of its common stock

as a liability on its consolidated balance sheets when the warrant is a free-standing financial instrument that may require the Company

to transfer cash consideration upon exercise and that cash transfer event would be out of the Company’s control.

Such a “liability

warrant”

is initially recorded at fair value on date of grant using the Black-Scholes model and net of issuance costs, and it is

subsequently re-measured to fair value at each subsequent balance sheet date.

Changes in fair value of the warrant are recognized as a

component of other income (expense), net in the consolidated statements of operations.

The Company will continue to adjust the liability

for changes in fair value until the earlier of the exercise or expiration of the warrant.

For warrants that do not meet the criteria of a liability warrant and

are classified on the Company’s consolidated balance sheets as equity instruments, the Company uses the Black-Scholes model to measure

the value of the warrants at issuance and then applies the relative fair-value of the equity transaction between common stock, preferred

stock and warrants.

Common stock, and equity-classified warrants each are considered permanent equity.

Concentration of Credit Risk

Financial investments that potentially subject the Company to

credit risk consists of cash.

Financial investments that potentially subject the Company to credit

risk consists of cash.

Deposits at banks may exceed the insurance provided on such deposits.

Generally, these deposits may

be redeemed upon demand and, therefore, bear minimal risk.

On March 28, 2018, the Company was awarded a Fast-Track Small

Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development (NICHD)

to support testing of pediatric Cellspan™

Generally, these deposits may be redeemed

upon demand and, therefore, bear minimal risk.

Grant income is recognized when qualified research and development

costs are incurred and recorded in other income (expense), net in the consolidated statements of operations.

When evaluating grant revenue

from the SBIR grant, the Company considered accounting requirements under the Financial Accounting Standards Board (FASB) Accounting Standards

Codification (ASC) 606, Revenue From Contracts With Customers .

The Company concluded that ASC 606 did not apply as there is

no exchange of goods or services or an exchange of intellectual property between the parties;

therefore, the Company presents grant income

in other income.

On March 28, 2018, the Company was awarded a Fast-Track Small Business

Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development (NICHD) to support testing

of pediatric Cellspan™

Esophageal Implants (CEIs).

The award for Phase I, which was earned over the nine

months ended September 30, 2018, provided for the reimbursement for up to $225,000 of qualified research and development costs.

October 26, 2018, the Company was awarded Phase II of the SBIR grant for $1.1 million to support development, testing, and translation

to the clinic through September 2019.

The Phase II grant includes an additional $0.5 million for future period support through

September 2020, subject to availability of funding and satisfactory progress on the project.

In December 2019, the Company submitted

a modified Phase II grant development plan which has not yet been approved by the NICHD.

The SBIR grant has the potential to provide

a total award of approximately $1.8 million, of which $0.9 million has been expended through December 31, 2019.

Grant income is recognized based on timing of when qualified

research and development costs are incurred and recorded and classified as grant income in other income (expense), net in the consolidated

statements of operations.

The Company recognized $473,000 from Phase II during 2019 and $225,000 from Phase I and $176,000 from

Phase II in 2018.

The award for Phase I provided for the reimbursement of approximately $0.2 million

of qualified research and development costs which was received and recognized as grant income during 2018.

On October 26, 2018, the Company was awarded the Phase II Fast-Track

SBIR grant from the Eunice Kennedy NICHD grant aggregating $1.1 million to support development, testing, and translation to the clinic

through September 2019 and represented years one and two of the Phase II portion of the award.

On August 3, 2020, the Company was awarded

a third year of the Phase II grant totaling $0.5 million for support of development, testing, and translation to the clinic covering qualified

expenses incurred from October 1, 2019 through September 30, 2020._In September of 2020, the Company filed and was granted a one year,

no-cost extension for the Phase II grant period extending through September 30, 2021.

For the years ended December 31, 2020 and 2019, the Company recognized

$0.4 million and $0.5 million of grant income, respectively, from Phase II of the SBIR grant.

The aggregate SBIR grant to date provides

a total award of $1.8 million, of which, approximately $1.3 million has been recognized through December 31, 2020.

In March 2021, the Company received additional cash proceeds of $0.2

million from the Phase II of the SBIR grant.

Recently Adopted Accounting Pronouncements

In July 2017, the FASB issued ASU 2017-11, Earnings

Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments

with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of

Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11) .

This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics

of liabilities and equity.

Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument

(or an embedded conversion option) to be considered “not indexed to an entity’s own stock”

and therefore accounted

for as a derivative liability at fair value with changes in fair value recognized in current earnings.

Down round features are

most often found in warrants and conversion options embedded in debt or preferred equity instruments.

In addition, the guidance

re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with

no accounting effect.

This guidance became effective January 1, 2019 and had an immaterial impact on the Company’s consolidated

financial statements.

February 2016, the FASB, issued ASU 2016-02 Leases (Topic 842) (ASU 2016-02).

ASU 2016-02 requires lessees to recognize

most leases on the balance sheet.

This is expected to increase both reported assets and liabilities.

The This new lease

standard does not substantially change lessor accounting.

The Company adopted the new leasing standard on January 1, 2019,

using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019.

The Company elected to apply the package of practical expedients which allows entities not to reassess whether contracts are or

contain leases, lease classification, and whether initial direct costs qualify for capitalization.

Additionally, the Company elected

not to separate lease and non-lease components.

On adoption of the new leasing standard, the Company recognized a related right

to use asset and a lease liability of approximately $0.2 million on its consolidated balance sheet.

The impact of adoption of the

new leasing standard had an immaterial increase to the reported assets and liabilities on the Company’s consolidated balance

sheet, and had an immaterial impact to its consolidated statements of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair

Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement .

This standard

modifies certain disclosure requirements on fair value measurements.

This standard was effective for the Company on January 1, 2020.

adoption of this standard did not have a material impact on the Company’s disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

November 2018, the Financial Accounting Standards Board ( FASB) issued Accounting Standards

Update 2018-18 ( ASU 2018-18), Collaborative Arrangements (Topic 808):

Clarifying the Interaction

between Topic 808 and Topic 606.

This standard makes targeted improvements for collaborative arrangements as follows:

Clarifies that certain transactions between collaborative arrangement participants should be accounted

for as revenue under Accounting Standards Codification 606 (ASC 606), Revenue from Contracts with Customers (ASC 606) ,

when the collaborative arrangement participant is a customer in the context of a unit of account.

In those situations, all the

guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements;

Adds unit-of-account guidance to ASC 808, Collaborative Arrangements , to align with the

guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or

a part of the arrangement is within the scope of ASC 606;

Precludes a company from presenting transactions with collaborative arrangement participants that

are not directly related to sales to third parties with revenue recognized under ASC 606 if the collaborative arrangement participant

is not a customer.

This standard is effective

for the Company on January 1, 2020.

The adoption of this standard is not expected to have an impact on the Company’s consolidated

financial position, results of operations and related disclosures.

In August 2018, the FASB

issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair

Value Measurement .

This standard modifies certain disclosure requirements on fair value measurements.

This standard is effective

for the Company on January 1, 2020.

The adoption of this standard is not expected to have a material impact on the Company’s

In June 2016, the FASB issued ASU No.

2016-13, Financial

Instruments - Credit Losses (Topic 326):

2016-13, Financial Instruments

- Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASU 2016-12) .

The FASB subsequently

issued amendments to ASU 2016-13, which has an effective date for year ends beginning after December 15, 2019, and ASU 2016-12,

which has an effective date for year ends beginning after December 15, 2020.

These standards require that credit losses be reported

using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures

related to credit risks.

For available-for-sale debt securities with unrealized losses, these standards now require allowances

to be recorded instead of reducing the amortized cost of the investment.

These standards limit the amount of credit losses to be

recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal

of previously recognized credit losses if fair value increases.

The adoption of these standards is not expected to have a

material impact on the Company’s consolidated financial position, results of operations and related disclosures.

Other accounting standards that have been issued or proposed

by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material

impact on the Company’s financial statements upon adoption.

new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale

debt securities be recorded through an allowance for credit losses.

It also limits the amount of credit losses to be recognized for available-for-sale

debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit

losses if fair value increases.

The Company expects to delay adoption until January 1, 2023 and is evaluating the impact that the adoption

of ASU 2016-13 will have on its consolidated financial statements.

In August 2020, the FASB issued

2020-06, Debt –

Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts

in Entity’s Own Equity (Subtopic 815-40) .

This standard amends the guidance on convertible instruments and the derivatives scope

exception for contracts in an entity’s own equity and improves and amends the related earnings per share (“EPS”) guidance

for both Subtopics.

The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual

periods and early adoption is permitted in annual reporting periods ending after December 15, 2020.

The Company does not expect this pronouncement

to have a material impact on its condensed consolidated financial statements.

Other accounting standards that have been issued or proposed by the

FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on

the Company’s financial statements upon adoption.

Notes Payable

On May 4, 2020, the Company obtained a loan (Loan) from the Bank of

America (Lender) in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Plan (PPP), established as part of the CARES

The Loan is evidenced by a promissory note dated May 4, 2020 issued by the Company and will accrue interest at a fixed interest rate

of 1% per annum from the funding date of May 4, 2020.

Payments of principal and interest have been deferred since the funding under the

original terms of the promissory note.

However, the Loan and accrued interest may be forgivable at the conclusion of this period.

Under the terms of the PPP, certain amounts of the Loan may be forgiven

if they are used for qualifying expenses as described in the CARES Act.

The terms of the promissory note, including eligibility and forgiveness,

may be subject to additional requirements adopted by the SBA.

Any unforgiven portion of the PPP loan, including principal and interest,

will mature on May 4, 2022 and will be required to be payable monthly.

The Note may be prepaid by the Company at any time prior to maturity

with no prepayment penalties.

The Company has accounted for the loan under FASB ASC 470, Debt .

Repayment amounts due within one year have been recorded as current liabilities, and the remaining amounts due in more than one year as

long-term liabilities.

On December 18, 2020, the Company submitted the loan forgiveness application for the entire borrowings of $0.4

million to the Lender and was notified on January 7, 2021 that the application was submitted to the Small Business Administration (SBA)

The SBA has up to 90 days from the date of submittal to make a final decision on loan forgiveness.

The Company has yet to

be notified of the SBA’s forgiveness decision.

If the Company is successful in receiving forgiveness for any portion

of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment.

Fair Value Measurements

Fair value is defined as the exchange price that would be received

for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability

in an orderly transaction between market participants on the measurement date.

The Company utilizes a valuation hierarchy for disclosure of

the inputs to the valuations used to measure fair value.

for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in

an orderly transaction between market participants on the measurement date.

The Company utilizes a valuation hierarchy for disclosure of the inputs

to the valuations used to measure fair value.

This hierarchy prioritizes the inputs into three broad levels as follows.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are quoted

prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly

or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 inputs are unobservable

inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial asset or

liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the

fair value measurement.

Level 1 inputs

are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are quoted prices for similar assets

and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market

corroboration, for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs based on the Company’s

own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the

hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company had no assets or liabilities classified as Level 2.

The Company’s restricted cash that serves as collateral for the Company’s credit card program is held in a demand money

market account and is measured at fair value based on quoted prices, which are Level 1 inputs.

The Company has concluded that warrants

to purchase common stock, which are accounted for as liabilities as discussed in Note 7 are classified as Level 3.

The following fair value hierarchy table presents information

about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019

The Company’s restricted cash that serves as collateral for the Company’s credit card program is held in a demand money market

account and is measured at fair value based on quoted prices, which are Level 1 inputs.

The Company has concluded that warrants to purchase

common stock, which are accounted for as liabilities as discussed in Note 7 are classified as Level 3.

The following fair value hierarchy table presents information about

the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019:

Fair Value Measurement as of December 31, 2020

6 unchanged sentences

Warrant liability

There were no transfers between Level 1, Level 2 and

Level 3 in either of the years ended December 31, 2019 and December 31, 2018.

There were no transfers between Level 1, Level 2 and Level

3 in either of the years ended December 31, 2020 and December 31, 2019.

Prepaid Expenses and Other Current Assets

2 unchanged sentences

Sponsored research

Annual contracts

Other current assets

9 unchanged sentences

Property, plant and equipment, net

Depreciation expense amounted to $214,000 and $261,000 for the

years ended December 31, 2019 and 2018, respectively.

Depreciation expense amounted to $184,000 and $214,000 for the years

ended December 31, 2020 and 2019, respectively.

Accrued and Other Current Liabilities

1 unchanged sentence

(in thousands)

Audit expenses

Professional fees

Advisory costs

Other current liabilities

Total accrued and other current liabilities

Warrant Liability

On May 19, 2016 and February 10, 2017,

the Company closed a sale of shares of the Company’s common stock, the issuance of warrants to purchase shares of common

stock, and the issuance of warrants to the placement agent for each transaction.

Due to a cash put provision within the warrant

agreement, which could be enacted in certain change in control events, a liability associated with those warrants was initially

recorded at fair value in the Company’s consolidated balance sheets upon issuance, and subsequently re-measured each fiscal

The changes in the fair value between issuance and the end of each reporting period is recorded as a component of other

income (expense), net in the consolidated statements of operations.

During 2017, warrant holders of 952,184 warrants agreed to a

modification of the terms of their warrants which resulted in placing all situations that would allow the warrant holder to put

the warrant for cash fully in control of the Company.

As a result of the modification, the modified warrants are no longer liability

classified and do not need to be re-measured.

These modifications resulted in a $3.7 million value of those warrants being reclassified

from Warrant Liabilities to Additional Paid in Capital.

The remaining un-modified 92,212 warrants continue to be re-measured at

each reporting period as long as they are outstanding and un-modified.

The Company has re-measured the liability to estimated fair

value at inception, prior to modification and at each reporting date using the Black-Scholes option pricing model with the following

weighted average assumptions:

On May 19, 2016 and February 10, 2017, the Company closed a sale of

shares of the Company’s common stock, the issuance of warrants to purchase shares of common stock, and the issuance of warrants

to the placement agent for each transaction.

Due to a cash put provision within the warrant agreement, which could be enacted in certain

change in control events, a liability associated with those warrants was initially recorded at fair value in the Company’s consolidated

balance sheets upon issuance, and subsequently re-measured each fiscal quarter.

The changes in the fair value between issuance and the

end of each reporting period is recorded as a component of other income (expense), net in the consolidated statements of operations.

During 2017, warrant holders of 952,184 warrants agreed to a modification

of the terms of their warrants which resulted in placing all situations that would allow the warrant holder to put the warrant for cash

fully in control of the Company.

As a result of the modification, the modified warrants are no longer liability classified and do not

need to be re-measured.

These modifications resulted in a $3.7 million value of those warrants being reclassified from Warrant Liabilities

to Additional Paid in Capital.

The remaining un-modified 92,212 warrants, which remain outstanding as of December 31, 2020, continue to

be re-measured at each reporting period as long as they are outstanding and un-modified.

The Company has re-measured the liability to estimated fair value at

inception, prior to modification and at each reporting date using the Black-Scholes option pricing model with the following weighted average

Assumptions for Estimating Fair Value

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(in thousands)

Balance at December 31, 2017

Balance as of December 31, 2018

Change in fair value upon re-measurement

Balance at December 31, 2018

Balance as of December 31, 2019

Change in fair value upon re-measurement

Balance at December 31, 2019

Balance as of December 31, 2020

Commitments and Contingencies

First Pecos Breach Notice

In June, 2017, the Company entered into a binding Memorandum

of Understanding with First Pecos, LLC (First Pecos), pursuant to which the Company agreed to issue to First Pecos in a private

placement 485,000 shares of its common stock on a post-reverse split basis at a purchase price of $6.30 per share or, to the extent

First Pecos, following the transaction, would own more than 19.9% of the Company’s common stock, shares of a new class of

preferred stock of the Company with a per-share purchase price of $1,000.

In October 2017, as a result of the First Pecos failure to deliver

the Purchase Price to the Company following satisfaction of all closing conditions in the Purchase Agreement, the Company delivered

a notice to First Pecos and its manager, Leon “Chip”

Greenblatt III, stating that First Pecos was in breach of the

Purchase Agreement.

None of the shares of common stock, shares of preferred stock or warrants were issued to First Pecos.

in October 2017, First Pecos delivered a notice to the Company stating that, as a result of alleged breaches by the Company of

its obligations pursuant to the Purchase Agreement, First Pecos terminated the Purchase Agreement and demanded that the Company

pay a $500,000 termination fee pursuant to the terms of the Purchase Agreement.

The Company believes that it was not in breach of the Purchase

Agreement at any time, and that the First Pecos notice was unjustified and without any legal merit or factual basis.

the Company believes that First Pecos was not entitled to terminate the Purchase Agreement, and was not entitled to any termination

fee thereunder, as the failure to consummate the Pecos Placement resulted from the First Pecos breach of the Purchase Agreement.

The Company has not accrued for this liability as the Company believes the claim to be without merit.

On April 14, 2017, representatives for the estate of a deceased

individual filed a civil lawsuit in the Suffolk Superior Court, in Boston, Massachusetts, against the Company and Harvard Bioscience,

Inc., the Company’s former parent company.

The complaint alleges that the decedent’s injury and death were caused by

two tracheal implants that incorporated synthetic trachea scaffolds and a biologic component combined by the implanting surgeon

with a bioreactor, and surgically implanted in the decedent in two surgeries performed in 2012 and 2013.

The civil complaint seeks

a non-specific sum of money to compensate the plaintiffs.

This civil lawsuit relates to the Company’s first-generation trachea

scaffold technology for which the Company discontinued development in 2014, and not to the Company’s current Cellframe technology

nor to its lead development product candidate, the CEI.

individual filed a civil lawsuit in the Suffolk Superior Court, in Boston, Massachusetts, against the Company and Harvard

Bioscience, Inc., the Company’s former parent company.

The complaint alleges that the decedent’s injury and death were

caused by two tracheal implants that incorporated synthetic trachea scaffolds and a biologic component combined by the implanting

surgeon with a bioreactor, and surgically implanted in the decedent in two surgeries performed in 2012 and 2013.

The civil complaint

seeks a non-specific sum of money to compensate the plaintiffs.

This civil lawsuit relates to the Company’s first-generation

trachea scaffold technology for which the Company discontinued development in 2014, and not to the Company’s current Cellframe

technology nor to its lead development product candidate, the CEI.

The Company intends to vigorously defend this case.

While the Company believes

that such claim lacks merit, the Company is unable to predict the ultimate outcome of such litigation.

In accordance with the Separation

and Distribution agreement between Harvard Bioscience and the Company relating to the spin-off of the Company in 2013, the Company

would be required to indemnify Harvard Bioscience against losses that Harvard Bioscience may suffer as a result of this litigation.

The Company has been informed by its insurance provider that the case has been accepted as an insurable claim under the Company’s

product liability insurance policy.

The Company has not accrued for a potential liability as it is not considered probable at this

From time to time, the Company may be involved in various claims

and legal proceedings arising in the ordinary course of business.

Other than the above matter, there are no such matters pending

that the Company expects to be material in relation to its business, financial condition, and results of operations or cash flows.

Company believes that such claim lacks merit, the Company is unable to predict the ultimate outcome of such litigation.

accordance with the Separation and Distribution agreement between Harvard Bioscience and the Company relating to the spin-off of the

Company in 2013, the Company would be required to indemnify Harvard Bioscience against losses that Harvard Bioscience may suffer as

a result of this litigation.

The Company has been informed by its insurance provider that the case has been accepted as an insurable

claim under the Company’s product liability insurance policy.

The Company has not accrued for a potential liability as it is

not considered probable at this time.

From time to time, the Company may be involved in various claims and

legal proceedings arising in the ordinary course of business.

Other than the above matter, there are no such matters pending that the

Company expects to be material in relation to its business, financial condition, and results of operations or cash flows.

The Company leases laboratory and office space and certain equipment

with remaining terms ranging from 1 year to 5 years.

The laboratory and office arrangement is under a sublease that

was renewed in December of 2019 and currently extends through May 31, 2021.

This lease automatically renews annually for a one-year

period unless the Company or Harvard Bioscience provides a notice of termination within one hundred and eighty days prior to May

31 of each year.

Total rent expense was $102,000 for each of the years ended December 31, 2019 and 2018.

The laboratory and office arrangement is under a sublease that was

renewed in December of 2020 and currently extends through May 31, 2022.

This lease automatically renews annually for a one-year period

unless the Company or Harvard Bioscience provides a notice of termination within one hundred and eighty days prior to May 31 of each year.

All of the Company’s leases qualify as operating leases.

The following table summarizes the presentation of the Company’s operating leases in its consolidated balance sheets:

following table summarizes the presentation of the Company’s operating leases in its consolidated balance sheets:

(in thousands)

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Right-of-use asset

Current operating lease liabilities

Current portion of operating lease liabilities

Non-current operating lease liabilities

Current portion of operating lease liabilities

Operating lease liabilities, net of current portion

Total operating lease liabilities

The following table summarizes the effect of lease costs in the Company’s condensed consolidated statements of operations:

(In thousands)

Statement of Operations Classification

Operating lease expense

Research and development

Selling, general and administrative

The minimum lease payments for the next five years and thereafter

are expected to be as follows:

Cash paid for leases included in cash used in operating activities

in the Company’s consolidated statement of cash flows during the years ended December 31, 2020, and 2019 amounted to approximately

$121,000 and $114,000, respectively.

The weighted average remaining lease terms and weighted average discount

rates as of December 31, 2020 and 2019 were as follows:

Year ended December 31,

Remaining lease term (in years)

Discount rate

The following table summarizes the effect of lease costs in the Company’s

condensed consolidated statements of operations:

the Year Ended December 31

of Operations Classification

lease expense

and development

general and administrative

The minimum lease payments for the next five years and thereafter are

expected to be as follows:

(In thousands)

December 31, 2020

Total lease payments

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Present value of operating lease liabilities

Cash paid included in the computation of the right of use asset

and lease liability during the year ended December 31, 2019 amounted to approximately $114,000.

The weighted average remaining lease term and weighted average

discount rate of the Company’s operating leases are as follows:

Weighted average remaining lease term (in years)

Weighted average discount rate

Future minimum lease payments under the Company’s operating

leases as of December 31, 2018 amounted to $102,000 in 2019 and $42,000 in 2020 as disclosed in the notes the 2018 financial statements.

The Company’s net loss was generated entirely in the U.S.

in 2019 and 2018.

Income taxes for the years ended December 31, 2019 and 2018 differed from the amount computed by applying the

federal income tax rate of 21% for both 2019 and 2018 to pre-tax loss as a result of the following:

2020 and 2019.

Income taxes for the years ended December 31, 2020 and 2019 differed from the amount computed by applying the U.S.

income tax rate of 21% for both 2020 and 2019 to pre-tax loss as a result of the following:

Years ended December 31,

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Permanent items, primarily change in fair value of warrants and non-deductible share-based compensation

Share-based compensation

Stock-option cancellations

Adjustment of prior year income tax

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Total income taxes

The components of the Company’s deferred tax asset are

The components of the Company’s deferred tax asset are as follows:

Years ended December 31,

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Deferred tax liability:

Right of use asset

Operating lease assets

Total deferred tax liability

The Company has recorded a valuation allowance against its deferred

tax assets for the years ended December 31, 2019 and 2018, because the Company’s management believes that it is more likely

than not that these assets will not be realized.

The valuation allowance increased by $2.7 million and $0.4 million for the years

ended December 31, 2019 and 2018 primarily as a result of operating losses generated with no corresponding financial statement

As of December 31, 2019, the Company had federal net operating

loss carryforwards (NOLs) of approximately $42.7 million to offset future federal taxable income and state NOLs of approximately

$42.1 million to offset future state taxable income.

The federal and state NOLs generated for annual periods prior to January 1,

2017 begin to expire in 2033.

The Company’s federal NOL generated for the year ended December 31, 2019, which amounted to

tax assets for the years ended December 31, 2020 and 2019, because the Company’s management believes that it is more likely than

not that these assets will not be realized.

The valuation allowance increased by approximately $1.0 million and $2.7 million for the years

ended December 31, 2020 and 2019, respectively, primarily as a result of operating losses generated with no corresponding financial statement

As of December 31, 2020, the Company had federal net operating loss

carryforwards (NOLs) of approximately $47.9 million to offset future federal taxable income and state NOLs of approximately $47.4 million

to offset future state taxable income.

The federal and state NOLs generated for annual periods prior to January 1, 2018 begin to expire

The Company’s federal NOL generated for the years ended December 31, 2018 through December 31, 2020, which amounted to

$21.4 million, can be carried forward indefinitely.

As of December 31, 2019, the Company also has federal and state tax research

and development credit carryforwards of approximately $1.4 million and $0.9 million, respectively, to offset future income taxes.

The federal and state research and development tax credit carryforwards begin to expire in 2033 and 2029, respectively.

As of December 31, 2020, the Company also has federal and state tax research and development

credit carryforwards of approximately $1.4 million and $1.0 million, respectively, to offset future income taxes.

The federal and state

research and development tax credit carryforwards begin to expire in 2033 and 2029, respectively.

Under the provisions of the Internal Revenue Code, the net operating

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Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes

in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382

and 383 of the Internal Revenue Code, respectively, as well as similar state provisions.

This could limit the amount of tax attributes

that can be utilized annually to offset future taxable income or tax liabilities.

The amount of the annual limitation is determined

based on the value of the Company immediately prior to the ownership change.

Subsequent ownership changes may further affect the

limitation in future years.

The Company has recently completed several equity financings transactions which have either individually

or cumulatively resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result

in a change in control in the future.

The Company does not believe the impact of any limitation on the use of its net operating

loss or credit carryforwards will have a material impact on the Company’s consolidated financial statements since the Company

has a full valuation allowance against its deferred tax assets due to the uncertainty regarding future taxable income for the foreseeable

For all years through December 31, 2019, the Company generated

research credits but has not conducted a study to document the qualified activities.

This study may result in an adjustment to

the Company's research and development credit carryforwards;

however, until a study is completed and any adjustment is known, no

amounts are being presented as an uncertain tax position.

A full valuation allowance has been provided against the Company's research

and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax

asset established for the research and development credit carryforwards and the valuation allowance.

in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383

of the Internal Revenue Code, respectively, as well as similar state provisions.

This could limit the amount of tax attributes that can

be utilized annually to offset future taxable income or tax liabilities.

The amount of the annual limitation is determined based on the

value of the Company immediately prior to the ownership change.

Subsequent ownership changes may further affect the limitation in future

The Company has recently completed several equity financings transactions which have either individually or cumulatively resulted

in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code or could result in a change in control in the future.

The Company does not believe the impact of any limitation on the use of its net operating loss or credit carryforwards will have a material

impact on the Company’s consolidated financial statements since the Company has a full valuation allowance against its deferred

tax assets due to the uncertainty regarding future taxable income for the foreseeable future.

For all years through December 31, 2020, the Company generated research

credits but has not conducted a study to document the qualified activities.

This study may result in an adjustment to the Company's research

and development credit carryforwards;

however, until a study is completed, and any adjustment is known, no amounts are being presented

as an uncertain tax position.

A full valuation allowance has been provided against the Company's research and development credits and,

if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research

and development credit carryforwards and the valuation allowance.

Harvard Bioscience received a Supplemental Ruling to the Private

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Bioscience will qualify as a transaction that is tax-free for U.S.

federal income tax purposes under Section 355 and 368(a)(1)(D)

of the Internal Revenue Code continuing in effect.

federal income tax purposes under Section 355 and 368(a)(1)(D) of

the Internal Revenue Code continuing in effect.

The private letter and supplemental rulings and the tax opinion that Harvard

Bioscience received from legal counsel to Harvard Bioscience rely on certain representations, assumptions and undertakings, including

those relating to the past and future conduct of the Biostage business, and neither the private letter and supplemental rulings

nor the opinion would be valid if such representations, assumptions and undertakings were incorrect.

Moreover, the private letter

and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for

tax-free treatment.

Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution

should be treated as a taxable transaction for U.S.

federal income tax purposes if, among other reasons, it determines any of the

representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings

are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.

To preserve the tax-free treatment to Harvard Bioscience of

the Separation and Distribution, for the two-year period following the Distribution, which such period ended November 1, 2015,

the Company was limited, except in specified circumstances, from entering into certain transactions pursuant to which all or a

portion of the Company’s stock would be acquired, whether by merger or otherwise;

issuing equity securities beyond certain

repurchasing the Company’s common stock;

and ceasing to actively conduct the Company’s regenerative medicine

In addition, at all times, including during and following such two-year period, the Company may not take or fail to take

any other action that prevents the Separation and Distribution and related transactions from being tax-free.

If the Distribution fails to qualify for tax-free treatment,

in general, Harvard Bioscience would be subject to tax as if it had sold the Company’s common stock in a taxable sale for

its fair market value, and Harvard Bioscience stockholders who receive shares of Biostage common stock in the Distribution would

be subject to tax as if they had received a taxable Distribution equal to the fair market value of such shares.

Under the tax sharing agreement between Harvard Bioscience and

the Company, the Company would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution

to the extent that such tax resulted from (i) an acquisition of all or a portion of the Company’s stock or assets, whether

by merger or otherwise, (ii) other actions or failures to act by the Company, or (iii) any of the Company’s representations

or undertakings being incorrect or violated.

The Company’s indemnification obligations to Harvard Bioscience and its subsidiaries,

officers and directors are not limited by any maximum amount.

If the Company is required to indemnify Harvard Bioscience or such

other persons under the circumstances set forth in the tax sharing agreement, the Company may be subject to substantial liabilities.

All deferred tax assets prior to the Separation remained with

Harvard Bioscience.

The Company has determined that any uncertain tax positions

would have no material impact on the consolidated financial statements of the Company and there are no unrecognized tax benefits

or related interest and penalties accrued for the period for the years ended December 31, 2019 and 2018.

Bioscience received from legal counsel to Harvard Bioscience rely on certain representations, assumptions and undertakings,

including those relating to the past and future conduct of the Biostage business, and neither the private letter and supplemental

rulings nor the opinion would be valid if such representations, assumptions and undertakings were incorrect.

Moreover, the private

letter and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify

for tax-free treatment.

Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the

Distribution should be treated as a taxable transaction for U.S.

federal income tax purposes if, among other reasons, it determines

any of the representations, assumptions or undertakings that were included in the request for the private letter and supplemental

rulings are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS

To preserve the tax-free treatment to Harvard Bioscience of the Separation

and Distribution, for the two-year period following the Distribution, which such period ended November 1, 2015, the Company was limited,

except in specified circumstances, from entering into certain transactions pursuant to which all or a portion of the Company’s stock

would be acquired, whether by merger or otherwise;

issuing equity securities beyond certain thresholds;

repurchasing the Company’s

common stock;

and ceasing to actively conduct the Company’s regenerative medicine business.

In addition, at all times, including

during and following such two-year period, the Company may not take or fail to take any other action that prevents the Separation and

Distribution and related transactions from being tax-free.

If the Distribution fails to qualify for tax-free treatment, in general,

Harvard Bioscience would be subject to tax as if it had sold the Company’s common stock in a taxable sale for its fair market value,

and Harvard Bioscience stockholders who receive shares of Biostage common stock in the Distribution would be subject to tax as if they

had received a taxable Distribution equal to the fair market value of such shares.

Under the tax sharing agreement between Harvard Bioscience and the

Company, the Company would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the

extent that such tax resulted from (i) an acquisition of all or a portion of the Company’s stock or assets, whether by merger or

otherwise, (ii) other actions or failures to act by the Company, or (iii) any of the Company’s representations or undertakings being

incorrect or violated.

The Company’s indemnification obligations to Harvard Bioscience and its subsidiaries, officers and directors

are not limited by any maximum amount.

If the Company is required to indemnify Harvard Bioscience or such other persons under the circumstances

set forth in the tax sharing agreement, the Company may be subject to substantial liabilities.

All deferred tax assets prior to the Separation remained with Harvard

The Company has determined that any uncertain tax positions would have

no material impact on the consolidated financial statements of the Company and there are no unrecognized tax benefits or related interest

and penalties accrued for the period for the years ended December 31, 2020 and 2019.

The Company is subject to U.S.

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currently, no federal or state income tax returns are under examination by the respective taxing authorities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security

(CARES) Act was signed into law making several changes to the Internal Revenue Code.

The changes include but are not limited to increasing

the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing

the amount of net operating loss carryforwards that corporations can use to offset taxable income.

The tax law changes in the CARES Act

did not have a material impact on the Company’s income tax provision.

Employee Benefit Plan

The Company sponsors a retirement plan for its U.S.

which includes an employee savings plan established under Section 401(k) of the U.S.

employees, which

includes an employee savings plan established under Section 401(k) of the U.S.

Internal Revenue Code (the 401(k) Plan).

401(k) Plan covers substantially all full-time employees who meet certain eligibility requirements.

Contributions to the retirement

plan are at the discretion of management.

The Company’s matching contributions to the plan were approximately $109,000 and

$95,000 for the years ended December 31, 2019 and 2018, respectively.

The 401(k) Plan

covers substantially all full-time employees who meet certain eligibility requirements.

Contributions to the retirement plan are at the

discretion of management.

The Company’s matching contributions to the plan were approximately $62,000 and $109,000 for the years

ended December 31, 2020 and 2019, respectively.

Preferred Stock

There are no shares of any class of preferred stock outstanding

as of December 31, 2019 or December 31, 2018.

There are no shares of any class of preferred stock outstanding as

of December 31, 2020 or December 31, 2019.

Authorized shares for each preferred stock class is as follows:

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Series D Convertible Preferred Stock

(1) The Company issued 695,857 shares of its Series B convertible preferred stock in February 2015, which were subsequently converted

into common stock during the year ended December 31, 2015.

(2) The Company designated the Series C convertible preferred stock in August 2017, but did not issue any Series C convertible

preferred shares.

(3) On May 29, 2018, the holders of Series D preferred stock exercised their right to convert all of the 3,108 outstanding shares

of Series D preferred stock into 1.554 million shares of common stock as provided for under the Series D preferred stock agreement.

Undesignated Preferred Stock

The Board of Directors may exercise its authority to issue undesignated

preferred shares and determine the price, privileges and other terms of the shares without any further approval of stockholders.

Series D Convertible Preferred Stock

On December 27, 2017, the Company issued 518,000 shares of its

common stock at $2.00 per share, 3,108 shares of its Series D convertible preferred stock (the Series D preferred stock) at $1,000

per share, and warrants to purchase 3,108,000 shares of common stock at an exercise price of $2.00 per share, in exchange for aggregate

gross proceeds of approximately $4.1 million in a private placement transaction of unregistered shares.

The warrants were immediately

exercisable and expire in December 2022.

The Company allocated $2.1 million of consideration to the warrants using the relative

fair-value method and included such amount in additional paid in capital.

On May 29, 2018, the Company issued a total of 1,000,000 shares

of common stock to two new investors at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately

$3.6 million and $3.4 million, respectively, in an unregistered private placement transaction.

Following the issuance of these

shares, the holders of Series D preferred stock exercised their right to convert all of the 3,108 shares outstanding of Series

D preferred stock into 1.554 million shares of common stock as provided for under the Series D preferred stock agreement.

During 2019, the Company decreased the number of authorized

shares of common stock from 120 million to 60 million.

As of December 31, 2019, there were approximately 51.8 million shares of

common stock available for issuance.

During 2019, the Company decreased the number of authorized shares

of common stock from 120 million to 60 million.

As of December 31, 2020, there were approximately 50.6 million shares of common stock

available for issuance.

The following represent the Company’s common stock transactions

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2020 Capital Transactions

On June 12, 2019, the Company issued a total of 345,174 shares

of our common stock and warrants to purchase 345,174 shares of common stock to a group of investors at an exercise price of $3.70

per share, in exchange for aggregate gross and net proceeds of approximately $1.3 million, of which $0.7 million and $0.6 million

was allocated to the common stock and warrants, respectively.

On December 31, 2019, the Company issued a total of 143,230

shares of our common stock at a purchase price of $3.70 per share and warrants to purchase 143,230 shares of common stock at an

exercise price of $3.70 per share to a group of investors for aggregate gross and net proceeds in the amount of $0.5 million, of

which $0.4 million and $0.1 million was allocated to the common stock and warrants, respectively.

During the year ended December 31, 2020, the Company issued a total

of 151,027 and 125,000 shares of its common stock at purchase prices of $3.70 and $4.00 per share, respectively, and warrants to purchase

151,027 shares of common stock at an exercise price of $3.70 per share to a group of investors for aggregate gross and net proceeds of

approximately $1.1 million, of which, $1.0 million and $0.1 million was allocated to the common stock and warrants, respectively, utilizing

the relative fair value.

The Company classified these warrants on its consolidated balance sheets as equity, and valued using the Black-Scholes

model based on the following weighted average assumptions:

Risk-free interest rate

Expected volatility

Expected term

Expected dividend yield

Exercise price

Market value of common stock

During the year ended December 31, 2020, the Company issued 516,877

1,994,000 shares of our common stock to a group of investors in connection with the exercise of 1,994,000 previously issued warrants

at $2.00 per share for aggregate gross and net proceeds of approximately $4.0 million.

shares of our common stock to a group of investors in connection with the exercise of 516,877 previously issued warrants at $3.70 per

share for aggregate gross and net proceeds of approximately $1.9 million.

During the year ended December 31, 2020, the Company issued 414,000

a total of 3,506 shares of our common stock to employees due to the vesting of restricted stock units.

January and March 2020, the Company collectively issued a total of 151,027 shares of our common stock at a purchase price

of $3.70 per share and warrants to purchase 151,027 shares of common stock at an exercise price of $3.70 per share to a group of

investors for aggregate gross and net proceeds of approximately $0.6 million.

January and March 2020, t he Company collectively issued 214,000 shares of our common stock to a group of investors in connection

with the exercise of 214,000 previously issued warrants at $2.00 per share for aggregate gross and net proceeds of approximately

$0.4 million.

Warrant to purchase common stock activity for the year ended

December 31, 2019 was as follows:

shares of our common stock to a group of investors in connection with the exercise of 414,000 previously issued warrants at $2.00 per

share for aggregate gross and net proceeds of approximately $0.8 million.

During the year ended December 31, 2020, the Company issued a total

of 25,948 shares of our common stock to former chief executive officer and an employee due to the vesting of restricted stock units and

issuance of a common stock award.

2019 Capital Transactions

On June 12, 2019, the Company issued a total of 345,174 shares of our

common stock and warrants to purchase 345,174 shares of common stock to a group of investors at an exercise price of $3.70 per share,

in exchange for aggregate gross and net proceeds of approximately $1.3 million, of which $0.7 million and $0.6 million was allocated to

the common stock and warrants, respectively.

On December 31, 2019, the Company issued a total of 143,230 shares

of our common stock at a purchase price of $3.70 per share and warrants to purchase 143,230 shares of common stock at an exercise price

of $3.70 per share to a group of investors for aggregate gross and net proceeds in the amount of $0.5 million, of which $0.4 million and

$0.1 million was allocated to the common stock and warrants, respectively.

During the year ended December 31, 2019, the Company issued 1,994,000

shares of our common stock to a group of investors in connection with the exercise of 1,994,000 previously issued warrants at $2.00 per

share for aggregate gross and net proceeds of approximately $4.0 million.

During the year ended December 31, 2019, the Company issued a total

of 3,506 shares of our common stock to employees due to the vesting of restricted stock units.

Warrant to purchase common stock activity for the year ended December

31, 2020 was as follows:

Weighted-average

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Outstanding at December 31, 2020

2018 Private Placements

On June 29, 2018, the Company issued 250,000 shares of common

stock to an investor at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately $0.9 million

and $0.8 million, respectively, in an unregistered private placement transaction.

On May 23, 2018, the Company issued a total of 1,000,000 shares

of common stock to two new investors at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately

$3.6 million and $3.4 million, respectively, in an unregistered private placement transaction.

Following the issuance of these

shares, the holders of Series D preferred stock exercised their right to convert all of the 3,108 shares outstanding of Series

D preferred stock into 1.554 million shares of common stock as provided for under the Series D preferred stock agreement.

On February 20, 2018, the Company completed a private placement

of 302,115 shares of common stock at a purchase price of $3.31 per share for gross and net proceeds of $1.0 million.

January 3, 2018, the Company issued 50,000 shares of its common stock at $2.00 per share and warrants to purchase 75,000 shares

of common stock at an exercise price of $2.00 per share, in exchange for aggregate gross proceeds of $100,000 in an unregistered

private placement with Connecticut Children’s Medical Center (Connecticut Children’s).

The warrants were immediately

exercisable and expire in January 2023.

Connecticut Children’s Chief Executive Officer, James Shmerling, is a member of the

Company’s Board of Directors as well as the Board of Directors of Connecticut Children’s.

Employee Stock Purchase Plan

In 2013, the Company approved the 2013 Employee Stock Purchase

Plan (the ESPP Plan).

Under the ESPP Plan, participating employees can authorize the Company to withhold a portion of their base

pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock.

At the conclusion

of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair

market value of the Company’s common stock at the beginning or end of the period.

Shares are issued under the plan for the

six-month periods ending June 30 and December 31.

Under this plan, 7,500 shares of common stock are authorized for issuance of

which 4,534 shares were issued as of December 31, 2017.

There are 2,966 shares available for issuance as of December 31, 2019 and

December 31, 2018.

There was no ESPP Plan activity in 2019 or 2018.

In 2013, the Company approved the 2013 Employee Stock Purchase Plan

(the ESPP Plan).

Under the ESPP Plan, participating employees can authorize the Company to withhold a portion of their base pay during

consecutive six-month payment periods for the purchase of shares of the Company’s common stock.

At the conclusion of the period,

participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s

common stock at the beginning or end of the period.

Shares are issued under the plan for the six-month periods ending June 30 and December

Under this plan, 7,500 shares of common stock are authorized for issuance of which 4,534 shares have been issued as of December 31,

There are 2,966 shares available for issuance as of December 31, 2020 and December 31, 2019.

There was no ESPP Plan activity in

2020 or 2019.

Share-based Compensation

Biostage 2013 Equity Incentive Plan

The Company maintains the 2013 Equity Incentive Plan (the Plan)

for the benefit of certain officers, employees, non-employee directors, and other key persons (including consultants and advisory

Biostage Amended and Restated Equity Incentive Plan

The Company maintains the Amended and Restated Equity Incentive Plan

(the Plan) for the benefit of certain officers, employees, non-employee directors, and other key persons (including consultants and advisory

board members).

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The Company’s

policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option

exercises and vesting of the restricted stock units.

The vesting period for awards is generally four years and the contractual

life is ten years.

policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option exercises

and the vesting of restricted stock units.

The vesting period for awards is generally four years and the contractual life is ten years.

Canceled and forfeited options and awards are available to be reissued under the Plan.

In May 2018, the Company’s

Board of Directors approved an increase of 1,600,000 shares from 498,000 shares of its common stock authorized to be issued under

the Plan to 2,098,000 shares.

The Company also issued equity awards under the Plan at the

time of the Distribution to all holders of Harvard Bioscience equity awards as part of an adjustment (the Adjustment) to prevent

a loss of value due to the Distribution.

Compensation expense recognized under the Plan relates to service provided by employees,

board members and a non-employee of the Company.

There was no required compensation associated with the Adjustment awards to employees

who remained at Harvard Bioscience, and as of December 31, 2019 there was no unrecognized compensation costs since all the Adjustment

Awards were fully vested.

During 2019 and 2018, no options or restricted stock units were granted to Harvard Bioscience employees

or directors, and the Company does not anticipate issuing any to Harvard Bioscience employees in the future.

In June 2020, the Company’s shareholders approved the Amended

and Restated Equity Incentive Plan (the 2013 Equity Incentive Plan) to, among other things, increase of the number of shares of the Company’s

common stock available for issuance pursuant thereto by 3,000,000 shares, which increased the total shares authorized to be issued under

the Plan to 5,098,000.

There are 3,477,504 shares available for issuance as of December 31, 2020.

Stock option activity under the Plan for the year ended December 31,

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Options vested and expected to vest

The Company’s outstanding stock options include 475,650

performance-based awards that have vesting provisions subject to the achievement of certain business milestones.

In September 2019,

the Company deemed the achievement of one of the performance-based milestones totaling 95,131 shares probable for accounting purposes,

are now exercisable, and has recognized approximately $270,000 expense associated with this milestone during the year ended December

Total unrecognized compensation expense for the remaining 380,519 performance-based awards is approximately $1.1 million.

No expense has been recognized for these awards as of December 31, 2019 given that the milestone achievements for these awards

have not yet been deemed probable for accounting purposes.

Aggregate intrinsic value for outstanding options and exercisable

options for the year ended December 31, 2019 was $0 based on the Company’s closing stock price of $2.01 per share as of December

As of December 31, 2019, unrecognized compensation cost related to unvested non-performance based awards amounted to

$1.0 million, which will be recognized over a weighted average period of 1.1 years.

The Company uses the Black- Scholes model to value its stock

The weighted average assumptions for valuing those options granted were as follows:

The Company’s outstanding stock options include 338,663 performance-based

awards that have vesting provisions subject to the achievement of certain business milestones.

In September 2019, the Company deemed the

achievement of one of the performance-based milestones totaling 95,131 shares probable for accounting purposes, are now exercisable, and

has recognized approximately $0.3 million expense associated with this milestone during the year ended December 31, 2019.

Total unrecognized

compensation expense for the remaining 243,532 performance-based awards is approximately $0.8 million.

No expense has been recognized

for these awards as of December 31, 2020 given that the milestone achievements for these awards have not yet been deemed probable for

accounting purposes.

Aggregate intrinsic value for outstanding options and exercisable options

for the year ended December 31, 2020 was $0 based on the Company’s closing stock price of $1.25 per share as of December 31, 2020.

As of December 31, 2020, unrecognized compensation cost related to unvested non-performance-based awards amounted to $0.4 million, which

will be recognized over a weighted-average period of 0.5 years.

The weighted average assumptions for valuing the Company’s stock

options granted were as follows:

Year Ended December 31,

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Expected dividend yield

The Company has used a mix of comparable companies volatility

and its historical volatility to estimate expected volatility.

Commencing July 1, 2018, the Company used its trading history to

measure volatility.

The grant date fair value of stock options is estimated using the Black-Scholes

option pricing model that takes into account the fair value of its common stock, the exercise price, the expected life of the option,

the expected volatility of its common stock, expected dividends on its common stock, and the risk-free interest rate over the expected

life of the option.

The risk-free interest rate assumption is based upon observed Treasury bill interest rates (risk-free) appropriate

for the expected term of the Company’s employee stock options.

The computation of expected volatility is based on the historical

volatility of the Company’s common stock.

The simplified method of estimating expected term was used.

In June 2019, the Company modified certain options to purchase

common stock and issued a 35,000 fully vested stock option grant as part of the termination arrangement for the Company’s

former chief financial officer, resulting in recording $92,000 and $62,000, respectively, of share-based compensation.

The Company also estimated the fair value of non-employee share

options using the Black-Scholes option pricing model reflecting the same assumptions as applied to employee and director options

in each of the reporting periods, other than the expected life, which is assumed to be the remaining contractual life of the options.

The Company has not paid and

do not anticipate paying cash dividends on the Company’s shares of common stock;

therefore, the expected dividend yield is assumed

In February 2020, as part of the termination arrangement with the Company’s

former chief executive officer, the Company modified certain options to purchase 236,970 shares of common stock, issued an 80,000 fully

vested stock option grant, and accelerated the vesting of 3,300 restricted stock units resulting in recording $153,000, $70,000, and $4,000,

respectively, of share-based compensation for the year ended December 31, 2020.

In June 2019, the Company modified certain options to purchase common

stock and issued a 35,000 fully vested stock option grant as part of the termination arrangement for the Company’s former chief

financial officer, resulting in recording $92,000 and $62,000, respectively, of share-based compensation.

The Company also estimated the fair value of non-employee share options

using the Black-Scholes option pricing model reflecting the same assumptions as applied to employee and director options in each of the

reporting periods, other than the expected life, which is assumed to be the remaining contractual life of the options.

The weighted average estimated fair value of stock options granted

using the Black-Scholes model was $1.84 per share during 2020 and $2.12 per share during 2019.

The Company also has issued restricted stock units under the

The Company also has issued restricted stock units under the Plan.

Unvested shares of restricted common stock may not be sold or transferred by the holder.

The following table summarizes the

Company’s unvested restricted stock unit activity under the Plan for the year ended December 31, 2019:

The following table summarizes the Company’s

unvested restricted stock unit activity under the Plan for the year ended December 31, 2020:

Unvested at December 31, 2019

Unvested at December 31, 2020

The grant date fair value for all restricted stock units activity

during the year ended December 31, 2019 was $7.68 per share.

The fair value of restricted shares of common stock vested during

the year ended December 31, 2019 amounted to approximately $7,000 in the aggregate.

Share-based compensation expense related to the Plan for the

years ended December 31, 2019 and 2018 was allocated as follows:

The grant date fair value for all restricted stock units activity during

the year ended December 31, 2020 was $7.68 per share.

The fair value of restricted shares of common stock vested during the year ended

December 31, 2020 amounted to approximately $8,000 in the aggregate.

Share-based compensation expense related to the Plan for the years

ended December 31, 2020 and 2019 was allocated as follows:

Years Ended December 31,

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basic and diluted

Company’s potentially dilutive securities, which include stock options, unvested restricted common stock units, Series

D convertible preferred stock and warrants, have been excluded from the computation of diluted net loss per share whenever the

effect of including them would be to reduce the net loss per share.

The Company’s potentially dilutive securities, which include

stock options, unvested restricted common stock units and warrants, have been excluded from the computation of diluted net loss per share

whenever the effect of including them would be to reduce the net loss per share.

In periods where there is a net loss, the weighted average

number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders

The following potential common shares were excluded from the

calculation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2019 and 2018 because

including them would have had an anti-dilutive effect:

number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is

The following potential common shares were excluded from the calculation

of diluted net loss per share attributable to common stockholders for the years ended December 31, 2020 and 2019 because including them

would have had an anti-dilutive effect:

Years Ended December 31,

Unvested restricted common stock units

Warrants to purchase common stock

Options to purchase common stock

Headcount Reduction

During the first quarter of 2018, the salaries paid to the officers

were increased to approximately 80% of their contracted rate.

The Company accrued a $104,000 difference between the officers’

contracted rates and amounts paid.

In July 2018, the Company paid these amounts and reinstated the officers’

their contracted rates.

Following the capital raises in December 2017 and January 2018 described above, the Company re-hired several

of its former employees into key positions in January 2018, and has since made additional hires.

The Company and its former chief financial officer entered into

a separation and release agreement effective June 14, 2019, that provided for 50% of his salary, or $154,500, be paid in equal

monthly installments over the course of twelve months, allowed approximately 81,000 of previously issued stock options to remain

exercisable up to two years after the effective date, and issued a new fully vested non-qualified stock option to purchase 35,000

shares of common stock of the Company with an expiration date three years from the effective date.

This stock option modification

and issuance to the Company’s former chief financial officer resulted in a $154,000 charge to share-based compensation expense

as noted in Note 14.

Subsequent to year end, the Company and its former chief executive

officer entered into a separation and release agreement effective February 7, 2020, that provided for 50% of his salary, or $187,500,

be paid in equal monthly installments over the course of twelve months, allowed approximately 237,000 of previously issued stock

options to remain exercisable up to eighteen months after the effective date, and issued a new fully vested non-qualified stock

option to purchase 80,000 shares of common stock of the Company with an expiration date eighteen months from the effective date.

Related Party Transactions

Due to Related Party

In connection with the Company’s private placement transaction

in December 2017, an investor placed a deposit in the amount of $0.3 million with the Company, which was subsequently repaid in

January 2018.

Unvested restricted common stock units

Subsequent Events

Equity Transactions

to year end, the Company issued a total of 151,027 shares of our common stock at a purchase price of $3.70 per share and

warrants to purchase 151,027 shares of common stock at an exercise price of $3.70 per share to a group of investors for aggregate

gross and net proceeds of approximately $0.6 million.

The Company also issued 214,000 shares of our common stock to a group of

investors in connection with the exercise of 214,000 previously issued warrants at $2.00 per share for aggregate gross and net

proceeds of approximately $0.4 million.

Coronavirus Pandemic

March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic.

There is significant

uncertainty as to the likely effects of this disease which may, among other things, materially impact the Company’s planned

clinical trials.

This pandemic or outbreak could result in difficulty securing clinical trial site locations, CROs,

and/or trial monitors and other critical vendors and consultants supporting the trial.

In addition, outbreaks or the perception

of an outbreak near a clinical trial site location could impact the Company’s ability to enroll patients.

These situations,

or others associated with Covid-19, could cause delays in the Company’s clinical trial plans and could increase expected

costs, all of which could have a material adverse effect on the Company’s business and its financial condition.

the current time, we are unable to quantify the potential effects of this pandemic on our future financial statements.

The Company has performed an evaluation of subsequent events

through the time of filing this Annual Report on Form 10-K with the SEC, and has determined that there are no such events to report

other than those already disclosed.

The Company has performed an evaluation of subsequent events through

the time of filing this Annual Report on Form 10-K with the SEC and has determined that there are no such events to report other than

those already disclosed.

Form 10-K Summary.

Pursuant to the requirements of Section 13 or 15(d) of the Securities

Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly

Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Biostage, Inc.

March 27, 2020

Pursuant to the requirements of the Securities Exchange Act

of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the

dates indicated:

March 27, 2020

April 13, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934,

this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

(principal executive officer)

/s/ Peter Chakoutis

Vice President of Finance

March 27, 2020

Peter Chakoutis

April 13, 2021

Pellegrino Jr.

Peter Pellegrino

Interim Vice President of Finance

(principal financial officer and principal accounting officer)

April 13, 2021

/s/ Jason Jing Chen

March 27, 2020

Jason Jing Chen

March 27, 2020

April 13, 2021

/s/ Herman Sanchez

Herman Sancez

April 13, 2021

/s/ James Shmerling

March 27, 2020

James Shmerling

/s/ Jeffrey Young

March 27, 2020

Jeffrey Young

April 13, 2021

/s/ Wei Zhang

March 27, 2020

April 13, 2021

EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report

on Form 10-K.

The following exhibits are filed as part of this Annual Report on Form

Where such filing is made by incorporation by reference to a previously filed document, such document is identified.

Description of Exhibit

and Distribution Agreement between Biostage, Inc.

Separation and Distribution Agreement between Biostage, Inc.

and Harvard Bioscience, Inc.

dated as of October 31, 2013 (previously filed

as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

and Restated Certificate of Incorporation of Biostage, Inc.

(previously filed as an exhibit to the Company’s Registration

Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated March 30, 2016 (previously filed as

an exhibit to the Company’s Current Report on Form 8-K, filed on March 31, 2016, and incorporated by reference thereto).

of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated May 26, 2016 (previously filed as an

exhibit to the Company’s Annual Report on Form 10-K, filed on March 17, 2017, and incorporated by reference thereto).

of Designations, Preferences and Rights of Series A Preferred Stock of Biostage, Inc.

classifying and designating the Series A

Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company’s Registration Statement

on Form 8-A, filed October 31, 2013, and incorporated by reference thereto).

of Designation of Series B Convertible Preferred Stock of Biostage, Inc.

classifying and designating the Series B Convertible

Preferred Stock (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on February 12, 2015,

and incorporated by reference thereto).

of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated April 26, 2017 (previously filed as

an exhibit to the Company's Current Report on Form 8-K, filed on April 27, 2017, and incorporated by reference thereto).

of Designations, Preferences, Rights and Limitations of Series C Convertible Preferred Stock of Biostage, Inc.

classifying and

designating the Series C Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K,

filed on August 17, 2017, and incorporated by reference thereto).

of Elimination of Series A Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company's Current

Report on Form 8-K, filed on August 17, 2017, and incorporated by reference thereto).

of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated December 22, 2017 (previously filed

as an exhibit to the Company's Current Report on Form 8-K, filed on December 22, 2017, and incorporated by reference thereto).

of Designations, Preferences, Rights and Limitations of Series D Convertible Preferred Stock of Biostage, Inc.

classifying and

designating the Series D Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K,

filed on January 3, 2018, and incorporated by reference thereto).

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Amended and Restated Certificate of Incorporation of Biostage, Inc.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated March 30, 2016 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on March 31, 2016, and incorporated by reference thereto).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated May 26, 2016 (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 17, 2017, and incorporated by reference thereto).

Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Biostage, Inc.

classifying and designating the Series A Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company’s Registration Statement on Form 8-A, filed October 31, 2013, and incorporated by reference thereto).

Certificate of Designation of Series B Convertible Preferred Stock of Biostage, Inc.

classifying and designating the Series B Convertible Preferred Stock (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on February 12, 2015, and incorporated by reference thereto).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated April 26, 2017 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on April 27, 2017, and incorporated by reference thereto).

Certificate of Designations, Preferences, Rights and Limitations of Series C Convertible Preferred Stock of Biostage, Inc.

classifying and designating the Series C Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 17, 2017, and incorporated by reference thereto).

Certificate of Elimination of Series A Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 17, 2017, and incorporated by reference thereto).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated December 22, 2017 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December 22, 2017, and incorporated by reference thereto).

Certificate of Designations, Preferences, Rights and Limitations of Series D Convertible Preferred Stock of Biostage, Inc.

classifying and designating the Series D Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 3, 2018, and incorporated by reference thereto).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

dated May 24, 2019 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on May 28, 2019, and incorporated by reference thereto).

1 unchanged sentence

(previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on March 31, 2016, and incorporated by reference thereto).

Stock Certificate evidencing shares of common stock (previously filed as an exhibit to the Company’s Registration Statement

on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Series B Convertible Preferred Stock Certificate (previously filed as an exhibit to the Company’s Annual Report on Form

10-K, filed on March 27, 2015, and incorporated by reference thereto).

Specimen Stock Certificate evidencing shares of common stock (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Specimen Series B Convertible Preferred Stock Certificate (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 27, 2015, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on May 16, 2016, and incorporated by reference thereto).

of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Amendment No.

2 to Form S-1 Registration Statement,

filed on February 7, 2017, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Amendment No.

2 to Form S-1 Registration Statement, filed on February 7, 2017, and incorporated by reference thereto).

Form of Placement Agent Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Amendment No.

2 to Form S-1 Registration Statement, filed on February 7, 2017, and incorporated by reference thereto).

2 to Shareholder Rights Agreement, dated as of August 14, 2017 between Biostage, Inc.

and Computershare Trust Company, N.A.,

as successor to Registrar and Transfer Company (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed

on August 17, 2017, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 3, 2018, and incorporated by reference thereto).

of Amendment to Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed

on December 18, 2019, and incorporated by reference thereto).

Description of Securities.

Property Matters Agreement between Biostage, Inc.

Form of Amendment to Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December 18, 2019, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 2, 2020, and incorporated by reference thereto).

Description of Securities (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 27, 2020, and incorporated by reference thereto).

Intellectual Property Matters Agreement between Biostage, Inc.

and Harvard Bioscience, Inc.

dated as of October 31, 2013 (previously filed

as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Distribution Agreement between Biostage, Inc.

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Product Distribution Agreement between Biostage, Inc.

and Harvard Bioscience, Inc.

dated as of October 31, 2013 (previously filed as an

exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Sharing Agreement between Biostage, Inc.

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Tax Sharing Agreement between Biostage, Inc.

and Harvard Bioscience, Inc.

dated as of October 31, 2013 (previously filed as an exhibit

to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Sublease by and between Biostage, Inc.

and Harvard Bioscience,

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November

6, 2013, and incorporated by reference thereto).

of Indemnification Agreement for Officers and Directors (previously filed as an exhibit to the Company’s Registration Statement

on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

2013 Equity Incentive Plan, as amended (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 29, 2019, and incorporated by reference thereto).

Employee Stock Purchase Plan (previously filed as an exhibit

to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

of Incentive Stock Option Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B,

filed July 31, 2013, and incorporated by reference thereto).

of Non-Qualified Stock Option Agreement for executive officers (previously filed as an exhibit to the Company’s Registration

Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

of Non-Qualified Stock Option Agreement for directors (previously filed as an exhibit to the Company’s Registration Statement

on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

of Deferred Stock Award Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B,

filed July 31, 2013, and incorporated by reference thereto).

and Harvard Bioscience, Inc.

dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto).

Form of Indemnification Agreement for Officers and Directors (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Amended and Restated Equity Incentive Plan (previously filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A, filed on April 28, 2020, and incorporated by reference thereto).

Employee Stock Purchase Plan (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Form of Incentive Stock Option Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Form of Non-Qualified Stock Option Agreement for executive officers (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Form of Non-Qualified Stock Option Agreement for directors (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Form of Deferred Stock Award Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

10.12&dagger;

Sublicense Agreement dated as of December 7, 2012 between Biostage,

and Harvard Bioscience, Inc., and related Trademark License Agreement, dated December 19, 2002, by and between Harvard Bioscience,

Sublicense Agreement dated as of December 7, 2012 between Biostage, Inc.

and Harvard Bioscience, Inc., and related Trademark License Agreement, dated December 19, 2002, by and between Harvard Bioscience, Inc.

and President and Fellows of Harvard College (previously filed as an exhibit to the Company’s Amendment No.

S-1 Registration Statement, filed on February 15, 2013, and incorporated by reference thereto).

Patent Rights Assignment dated December 21, 2012 between Biostage,

Paolo Macchiarini (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed

July 31, 2013, and incorporated by reference thereto).

Novel Surgery Agreement dated as of May 21, 2012 between Biostage,

and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Vladimir Alekseevich Porhanov (previously

filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference

Novel Surgery Agreement dated as of May 24, 2012 between Biostage,

and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital of Illinois, and

Mark Holterman, M.D.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31,

2013, and incorporated by reference thereto).

Amendment to Novel Surgery Agreement dated as of April 5, 2013

between Biostage, Inc.

and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital

of Illinois, and Mark Holterman, M.D.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B,

filed July 31, 2013, and incorporated by reference thereto).

Amendment to Novel Surgery Agreement dated as of June 26, 2013

between Biostage, Inc.

and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Igor S.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated

by reference thereto).

Form of Securities Purchase Agreement (previously filed as an exhibit to the Company's Amendment No.

2 to Form S-1 Registration Statement, filed on February 15, 2013, and incorporated by reference thereto).

Memorandum of Understanding, dated as of December 11, 2017,

between Biostage, Inc.

and Bin Zhao (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December

14, 2017, and incorporated by reference thereto).

Securities Purchase Agreement, dated December 27, 2017, between

Biostage, Inc.

and the purchasers named therein (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed

on January 3, 2018, and incorporated by reference thereto).

Patent Rights Assignment dated December 21, 2012 between Biostage, Inc.

Paolo Macchiarini (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Novel Surgery Agreement dated as of May 21, 2012 between Biostage, Inc.

and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Vladimir Alekseevich Porhanov (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Novel Surgery Agreement dated as of May 24, 2012 between Biostage, Inc.

and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital of Illinois, and Mark Holterman, M.D.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Amendment to Novel Surgery Agreement dated as of April 5, 2013 between Biostage, Inc.

and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital of Illinois, and Mark Holterman, M.D.

(previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Amendment to Novel Surgery Agreement dated as of June 26, 2013 between Biostage, Inc.

and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Igor S.

Polyakov (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto).

Offer Letter, dated June 4, 2018, between Biostage, Inc.

William Fodor, PhD (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June 10, 2018, and incorporated

by reference thereto).

Securities Purchase Agreement, dated June 12, 2019, between

Biostage, Inc.

and Junli He (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June 17, 2019,

and incorporated by reference thereto).

Separation and Release Agreement, dated June 14, 2019, between

Biostage, Inc.

and Thomas McNaughton (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June

17, 2019, and incorporated by reference thereto).

and William Fodor, PhD (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on July 10, 2018, and incorporated by reference thereto).

Separation and Release Agreement, dated June 14, 2019, between Biostage, Inc.

and Thomas McNaughton (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June 17, 2019, and incorporated by reference thereto).

Separation and Release Agreement, dated January 31, 2020, between Biostage, Inc.

and James McGorry (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on February 7, 2020, and incorporated by reference thereto).

Promissory Note, dated May 1, 2020, by Biostage, Inc.

in favor of Bank of America, N.A.

(previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on May 5, 2020, and incorporated by reference thereto).

Subsidiaries of Biostage, Inc.

Consent of RSM US LLP.

Certification of President of Biostage., pursuant to Rules 13a-15(e)

and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Vice President of Finance of Biostage, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of President of Biostage, Inc., pursuant to 18

Certification of President of Biostage., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Interim Vice President of Finance of Biostage, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of President of Biostage, Inc., pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Certification of Vice President of Finance of Biostage, Inc., pursuant to 18 U.S.C.

Certification of Interim Vice President of Finance of Biostage, Inc., pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures